Treasury bond yields collapse

Fed Chairman Bernanke today said that the Fed's ability to provide monetary stimulus via lower interest rates was obviously limited (since the Fed funds rate today is trading at a mere 0.375%), but that doesn't leave the Fed powerless—they can simply buy bonds. That means the Fed will likely start buying bonds, and that news resulted in sharply falling yields. 10-year Treasury bonds now yield 2.7%, as they close in on their all-time low of 2.0% (1941), and 30-year bonds yield 3.2%, which marks a new all-time low (they weren't issued prior to 1977). Bond yields have fallen over 100 bps since mid-November.

And so we are witnessing what is probably the final chapter in the great bond market rally that began in late 1981. If you don't own any Treasury bonds, it's way too late to be a buyer now, since the upside is becoming extremely limited while the downside risk (e.g., what if the Fed overstimulates and pushes inflation up?) is becoming enormous.

Manufacturing hits an air pocket

The Institute for Supply Management's manufacturing index has fallen sharply in the past two months, and is now suggesting that the economy will contract at a 4% annual rate in the current quarter. That would be only a 1% contraction over the course of three months, however, so it's hardly the end of the world. The economy could easily bounce back from the current panic-induced slump.

Residential construction finds a bottom

Amidst the pervasive doom and gloom it's nice to find nuggets of good news. After falling by half in the past 30 months, residential construction has been relatively stable for the past three months. It's reached the lowest level relative to the economy (just over 3%) since the government began keeping the numbers. It wouldn't be hard to guess that we've seen the worst, at least for this sector of the economy.